Global Economics

Dire Warning on British Manufacturing

A new report from Deloitte says the U.K.'s competitiveness in manufacturing may decline in the next five years due to talent shortages and lack of training

British manufacturing will slide to a woeful 20th position in the world competitiveness rankings over the next five years unless there are serious efforts to address its poor image and recruit new talent.

The UK is currently ranked 17th in the world in terms of the competitiveness of its manufacturing industries, according to a global index published for the first time by consultancy Deloitte today. By 2015 Britain will have been leapfrogged by Russia, Spain and South Africa.

The top of the table remains dominated by the fast-growing Asian giants. China is top of the league, and will remain so in five years' time, says Deloitte. India and South Korea will also retain their respective second and third places. But the US is set to slip from fourth to fifth over the next five years, overtaken by Brazil. And Japan will drop from sixth to seventh – swapping places with Mexico. Germany will hold on to its respectable eighth position.

Although the majority of Western European countries face challenges in the near future, British manufacturing is already less competitive than Switzerland and the Netherlands, and it faces far steeper declines in the near future.

"British manufacturing is high-end, high-skilled and high tech," David Raistrick, the UK manufacturing leader at Deloitte, said. "But it is less competitive than it was, and is set to fall further in the next few years."

All is not lost. Manufacturing is still the unsung hero of the British economy. The UK is the seventh-largest manufacturer in the world, led by pharmaceuticals, food and the aerospace and defence sectors. And the sector still accounts for some 14 per cent of UK GDP – compared with just 7 per cent from financial services. But the proportion has dropped from 20 per cent a decade ago as Britain's focus shifted to professional services and the public sector. And there is little sign of a change in trajectory, regardless of post-recession political rhetoric about "rebalancing the economy."

Sceptics say high labour costs, coupled with restrictive energy policies and environmental regulations, mitigate against the UK retaining a manufacturing base in the face of pressure from low-wage Asian competitors.

But the continued presence of the US and Germany in the global top 10 point to a more subtle analysis of where Britain is going wrong, according to Mr Raistrick. "The reality is that labour costs are only the second most important factor in determining manufacturing competitiveness," he said. "The most important thing of all is the availability of talented engineers, scientists and researchers."

At least part of the problem is image. "Manufacturing is 30 per cent of Germany's GDP, and there is still a cachet attached to 'made in Germany' and a lot of pride to being an engineer," Mr Raistrick said. "In Britain – quite wrongly – manufacturing is thought to be low-paid, blue-collar work in the grubby factories of 20 years ago."

In last week's emergency Budget, Chancellor George Osborne turned to private sector, export-led growth – boosted by a phased four-point drop in corporation tax – to pull the ailing economy out of recession despite vicious cuts to public spending.

While a business-friendly focus may provide some supply-side stimulus, reduced spending on education or cuts to Britain's science budget can only exacerbate the skills shortages already bedevilling British industry. "The UK could be up there with Germany or better," Mr Raistrick said. "But we need to encourage more people into manufacturing industries because it is the quality and availability of the country's brains that are putting on the brakes."